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Making an independent Bank of England work better Contents

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Chapter 2: Inflation performance and the monetary framework

Operational independence: UK inflation since 1997

10.One month after the pound’s departure from the Exchange Rate Mechanism in September 1992, the UK Government adopted an inflation target of 2 per cent or less “in the long term” as measured by RPIX.12 In 1995, the target was modified by then Chancellor Kenneth Clarke who announced the objective of keeping underlying inflation at “2.5 per cent or less”.13

11.When the Bank was given operational independence in 1997 by the then Chancellor Gordon Brown, it inherited the 2.5 per cent target for RPIX with the added stipulation that an open letter be written by the Governor to explain any one percentage point deviation from target.14 In 2003, Mr Brown modified the inflation target to two per cent expressed in terms of an annual rate of inflation as measured by the Consumer Price Index (CPI) (we cover this change in more detail from paragraph 22).15

12.With annual (RPIX) inflation having stabilised around 2.5 per cent by the start of the independence era, inflation remained relatively stable between 1997 and 2021, with RPIX/CPI staying within one percentage point of the MPC’s (2.5 per cent and 2 per cent) target 87 per cent of the time16 (see Chapter 3). However, from the start of 2021, inflation accelerated from 0.7 per cent to 5.4 per cent before reaching a 41-year high of 11.1 per cent in October 2022.17 External factors contributed to this acceleration in inflation. However, in Chapter 4 we discuss possible reasons behind errors made in the wider central banking community, including the Bank of England, in the recent conduct of monetary policy.

Figure 2: UK CPI inflation rates (monthly, year-on-year percentage changes)

Source: Office for National Statistics, ‘Consumer price inflation, historical estimates and recent trends, UK: 1950 to 2022’ (May 2022): https://www.ons.gov.uk/economy/inflationandpriceindices/articles/consumerpriceinflationhistoricalestimatesandrecenttrendsuk/1950to2022 [accessed 25 September 2023] and Office for National Statistics, ‘Consumer price inflation, UK: October 2023’ (November 2023): https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/latest [accessed 17 November  2023]

13.The UK’s continued track record of low and stable inflation after 1997 was seen by several witnesses as evidence of the success of the Bank’s operational independence and its inheriting the inflation targeting framework.18 Some considered that freeing monetary policy from short-term political decision-making is the most credible means of promoting price stability and therefore increased confidence in the UK’s economic outlook.19 Professor Charles Goodhart, Emeritus Professor of Banking and Finance at the London School of Economics, told us: “The fact that independence has been introduced … means that there is a greater likelihood of interest rates being adjusted for economic reasons, rather than to suit the political objectives of whatever Government it might be at that time.”20 Sir Paul Tucker, former Deputy Governor at the Bank, agreed, stating that it was “hard to imagine navigating the country out of grave financial crisis if a Minister had been deciding interest rates and monetary policy … Bond yields would have gone up and people would have expected inflationary finance.”21

14.Although witnesses acknowledged a positive contribution from Bank independence to this millennium’s low and stable inflation rates (prior to 2021), witnesses also pointed to other contributing factors. Radix Big Tent, a think tank, argued that it is impossible to “tease out the effects of independence from other factors” and that the practical impact of central bank independence on price stability is “unknowable.”22 Dr Raghuram Rajan, former Governor of the Reserve Bank of India, took a similar view, stating that central banks collectively contributed to bringing inflation down from the late 1990s but that there were also other factors at play.23

15.Martin Wolf, Chief Economics Commentator at the Financial Times (FT), told us: “the general environment for low inflation globally … was relatively friendly until very recently. How far one attributes [the Bank’s] success to its being given operational independence is difficult to assess, because we cannot analyse the counterfactual.”24

16.Economists have pointed to internationally-orientated pricing dynamics or ‘globalisation’ as a major factor in the industrialised-world’s inflation track record since the turn of the century (see Figure 3).

Figure 3: KOF (Swiss Economic Institute) Globalisation Index against median inflation rates from 22 OECD countries

Source: Available for free at ECB, ‘Globalisation and its implications for inflation in advanced economies’, ECB Economic Bulletin, Issue 4 (2021): https://www.ecb.europa.eu/pub/economic-bulletin/articles/2021/html/ecb.ebart202104_01~ae13f7fe4c.en.html

17.Several witnesses suggested that an important factor leading to low rates of inflation was globalisation.25 Roger Bootle, Chairman at Capital Economics, said: “Global conditions were very favourable to [the Bank’s] remit in getting inflation to the target.”26 Stephen D King, Senior Economic Adviser at HSBC, told us that low-cost producers “coming into the world economy with big increases in the effective labour supply of the global economy … created what I would describe as a deflationary tail-wind for the western world.”27 Related to this, Positive Money highlighted demand-side contributions to disinflation, which they argued to be the result of an increasingly casualised workforce and the weakening of trade union strength.28

18.Mr King further emphasised that what has been seen in the UK is part of a global phenomenon, and that it is “not quite correct to suggest that the UK uniquely dealt with inflation in a way that was different from other countries”.29 Since the mid-1980s, the UK’s inflation performance has been similar to that of many other large industrialised nations30 (see Figure 4 for an international comparison of CPI since 2010).31 The Office for National Statistics, having studied 17 countries including the UK, found in November 2022 that “the long period of low inflation between 1990 and 2020, can be recognised as common trends in consumer price inflation”.32 The period of low inflation ended in 2021. As Figure 4 shows, central banks in most developed countries struggled to control rising prices.

Figure 4: Annual percentage change in CPI (UK, Eurozone, France, Japan and US)

Source: ‘Global inflation tracker: see how your country compares on rising prices’ Financial Times (September 2023): https://www.ft.com/content/088d3368-bb8b-4ff3-9df7-a7680d4d81b2

19.When asked about the success or otherwise of independence, Andrew Bailey, Governor of the Bank of England, told us: “success in a very broad sense is two things. It is the clarity of the primary objectives and the institutional independence that goes with them; in other words, it is the institutional ability to put those objectives into practice.”33

20.Andrew Griffith MP, Economic Secretary to His Majesty’s (HM) Treasury, considered that independence had “been overwhelmingly a positive intervention, and the policy of the Government is absolutely supportive of the continued independence of the Bank, as far as it relates to monetary policy.”34

21.Looking at the last 25 years as a whole, operational independence has bolstered economic confidence and credibility in monetary policy making. While the precise contribution of independence to low inflation is difficult to quantify—with globalisation widely considered a contributing factor—the conditions established by independence have provided a strong foundation for low and stable inflation since 1997. It is our view that independence should be preserved.

The price stability framework

22.As noted above, when Gordon Brown announced the operational independence of the Bank of England in 1997, he set the Bank’s new MPC a target of 2.5 per cent. In 2003, Mr Brown modified the inflation target to two per cent expressed in terms of an annual rate of inflation as measured by the ‘harmonised’ CPI. Explaining the Chancellor’s decision, HM Treasury highlighted a paper from the ONS which stated:

“‘[A new global] consensus has helped shape the CPI during its development, meaning that it has some distinct advantages over RPIX as a macroeconomic indicator of inflation … The rate for the new target is ½ a percentage point lower than the old target because of differences in the way that CPI and Retail Prices Index excluding mortgage interest payments (RPIX) inflation are measured.”35

23.In his Budget speech on 20 March 2013, then Chancellor, the Rt Hon George Osborne, announced the first major changes to the Bank’s monetary policy remit since the 2008 financial crisis.36 Elaborating on the changes to the inflation target,37 the Chancellor stated: “The new remit explicitly tasks the MPC with setting out clearly the trade-offs it has made in deciding how long it will be before inflation returns to target.”38 The Budget report then emphasised: “Where shocks are particularly large and with persistent effects, the MPC is likely to be faced with more significant trade-offs between the speed with which it aims to bring inflation back to target and the consideration that should be placed on the variability of output.”39

24.Several witnesses agreed that the framework underpinning the Bank’s mandate on inflation, the two per cent inflation target, has proven successful in helping to deliver stable inflation and expectations.40 Professor Frederic Malherbe, Professor of Economics and Finance at University College London, told us: “The very clear target of 2% inflation helps anchor the discussions and the scrutiny.”41

25.However, some witnesses suggested that the two per cent inflation target had served to complicate the Bank’s financial stability objective during this period.42 Edward Chancellor, a financial historian, noted that the Bank rate had been set at an all-time low due to disinflation even though this was caused by forces “over which monetary policy had no control” (that is, globalisation).43 This, Mr Chancellor concluded, had inflated numerous asset price bubbles (housing in particular), corrupted the allocation of capital, lead to undue financial risk-taking (as investors were forced to ‘chase for yield’) and contributed to the ongoing pensions crisis.44

26.When discussing the potential for conflicts in the Bank’s objectives (see Chapter 3), witnesses elaborated on alternatives to the two per cent target or the need for greater flexibility over the timeframe in meeting it. Professor Goodhart (one of the architects of the two per cent target given to the Reserve Bank of New Zealand (RBNZ)) told us that two per cent was chosen, in part, to protect the RBNZ from the zero lower bound45 and that they “thought that 2% was a reasonable level that would satisfy Greenspan’s46 definition of inflation, which was that people would not notice it”. However, he noted that with the benefit of hindsight, “considering the extent of disinflation, we would have done better had we set it even lower, at 1% or even 0.5%”.47 This implies that interest rates would have been higher through the period in question, thereby limiting the financial risks alluded to by Mr Chancellor.

27.Roger Bootle also told us that in his view, in the run up to the 2008 financial crisis, “most central banks kept interest rates too low … If you recognise that and that interest rates sometimes have to play a role in restraining the financial sector more generally, you have to permit a certain degree of flexibility with the inflation target.”48

28.Kevin Warsh, former board member at the US Federal Reserve, advocated more flexibility surrounding the target: “I tend to prefer ranges versus point estimates, in part because of measurement error and in part because I think broad price stability can never be that precise … I broadly think that the precision is what led many of the central banks to overly stimulate economies a few years ago.” Mr Warsh added: “When we are thinking about numbers to the right of the decimal point [of the two per cent target], I think we are likely to make a mistake.”49

29.In view of the UK’s presently elevated levels of inflation, discussions about possible changes to the inflation target tended to focus on it being raised. However, witnesses were firmly of the view that there was no case, currently, for making any such modification. Professor Goodhart said that now was “the wrong moment to try to change the target … if they were to change the target at this point, it would have a devastating effect on credibility.”50 Stephen D King said that if inflation were four per cent in a year’s time, he would be uncomfortable with raising the inflation target at that time.51 Sir Howard Davies, Chairman at the NatWest Group, considered that “at the zero bound … it might be better to centre the inflation target elsewhere” but added: “The difficulty, of course, is moving from where we are to that without creating expectations of higher inflation that you might not particularly want to create.”52

30.Andrew Bailey told us: “The 2013 amendments to the framework did give us more flexibility over … how quickly to bring inflation back to target. It cast it in the context of a trade-off … we do, particularly in the current context, spend quite a lot of time focusing on as to how quickly to bring it back to target”.53

31.In the remit letter for the MPC sent to the Governor on 17 November 2022 (see Chapter 3), the Rt Hon Jeremy Hunt MP, Chancellor of the Exchequer, stated that “to provide certainty, I can confirm that this government will not change the definition of price stability”. The letter also said: “Any changes to this remit will be set out in future budgets and the inflation target will be confirmed alongside those events. There is a value in continuity and I will have proper regard to that, but I will always consider the case for a revised target on its merits.”54

Role of asset prices

32.There has long been debate over whether inflation target mandates should capture movements in asset prices given that their movements can have significant effects on financial and macroeconomic stability.55 Asset prices include housing/real estate, the value of stocks, bonds, derivatives and others. Some witnesses suggested a more prominent or formalised role for asset prices, in particular housing, in the Bank’s monetary policy considerations. Professor Goodhart told us that it was a “great pity that housing does not enter into the CPI … If housing had been included in the CPI [between 2010 and 2020], I think there would have been less pressure for such expansionary policies as were entertained at the time.”56

33.Edward Chancellor cautioned about distributional effects: “If you inflate asset prices, you benefit those who already own [assets], and you make it that much harder, particularly with housing, for people to get on to the housing ladder … Very low interest rates benefited investors, bankers and private equity people who could borrow at extremely low interest rates to buy assets that were rising in price. I do not think they were of much use to the general public.”57

34.Sir Howard Davies suggested that the centre of gravity in the debate over whether central banks should look to temper asset price inflation, as opposed to dealing with the aftermath of any financial boom and bust—the “leaners versus cleaners debate”, as he termed it—had shifted towards the “leaners”.58 He stated that “asset prices should be an important input into decision-making—because they can often tell you whether an imbalance is developing in the economy”. However, he was not convinced that a target for asset prices is a “feasible proposition”.59

35.Stephen D King was not certain that a central bank “is better than anyone else at trying to work out whether the valuation of the asset market at any point in time is appropriate or otherwise” and therefore was not in favour of including asset prices in the measure of inflation.60 Mr King added, however, that he was “a fan of central banks paying attention to asset prices and balance sheets more explicitly than sometimes happens”.61 Writing in the FT, Martin Wolf was of the view that “using monetary policy to target asset prices, rather than merely take them into account, is folly”. He considered that it was “not absurd to consider real activity … Happily, inflation-targeting is consistent with making real activity the ultimate goal.”62

36.Some witnesses made a case for reviewing the inflation target. While the Chancellor can change the target, the disadvantages of doing so when inflation is above target, outweigh the advantages. This is the case given the potential impact on the Bank’s credibility. When inflation is low the Bank should be cautious about the impact of a prolonged period of loose monetary policy on asset prices and financial stability.

Fiscal and monetary policy mix

37.The relationship between fiscal and monetary policy was a particular point of focus for witnesses. In terms of the conventional relationship, Sir Paul Tucker said: “The Treasury moves first with its fiscal policy and the monetary policymaker moves second. It is important that the regime goals and tools for the monetary policymaker … are completely clear”.63 Sir John Vickers agreed: “Monetary policy decision-makers move with higher frequency. Fiscal policy is an annual event”.64

38.In his book, We need to talk about inflation, Stephen D King referred to the relationship between monetary and fiscal policy as the (Richard) Burton-(Elizabeth) Taylor problem (“occasionally separated but always destined to reconnect”.)65 King argued: “The best way of dealing with Burton-Taylor is to ensure that monetary policy enjoys primacy over fiscal policy … that means … that the central bank should be expected to comment on, and act upon, the monetary implications of any fiscal decision.”66

39.However, prolonged periods of low inflation through much of the independence era have fuelled a debate about a more appropriate policy mix when central banks are obliged to lower interest rates toward their lower bound (and/or introduce quantitative easing).67 With research showing that low interest rates encourage greater (financial) risk-taking68 (and with higher interest rates potentially creating strains for debt management) the issue is therefore linked to the relationship between the Bank’s inflation and financial stability objectives. This debate has grown particularly since the 2008 financial crisis. The Economist wrote in 2009 that the “current crisis suggests that monetary and fiscal policy cannot be driven exclusively by economic fundamentals … When interest rates are low, consumers and businesses … borrow money to buy assets, setting up a feedback loop that can eventually lead to a bubble.”69

40.Witnesses discussed the inter-relationship between fiscal policy, monetary policy and financial stability when interest rates fall to their lower bound.70 Roger Bootle considered that the lower bound is “undoubtedly a huge problem”.71 Mr Bootle felt there to be little reason why “one could not have a system under which the central bank was independent … and fiscal policy was bound to come in support” should the zero lower bound be reached.72 When asked whether this would involve explicit co-ordination of short-term macroeconomic policy between the Bank and HM Treasury, Mr Bootle said: “Yes. In those circumstances that would be required, but I think that would be perfectly possible within the current framework. I do not see how one would need to revise the framework in order to make that possible.”73

41.Professor Malherbe argued that “In the case of the zero lower bound, indeed, it makes sense then to have the Treasury stimulating the economy. I do not think it goes at all against the fundamental principles that were set [out in the Bank of England Act 1998].”74 Likewise, Positive Money said that greater coordination [between fiscal and monetary policy] would “enable a more pragmatic (and much improved) approach towards fiscal and monetary policy.”75

42.Despite support for more coordination, no witness advocated for a formal structure to coordinate monetary and fiscal policy. Sir Howard Davies thought such a structure was “dangerous”. He told us: “Making this a structural solution would give a more activist Chancellor a way into Bank decision-making on a continuous basis, which would not be particularly helpful … I am not sure that an institution or a framework is the right solution”.76

43.On the relationship between monetary and fiscal policy, Andrew Bailey explained: “[The Chancellor and I] share views on what is going on in the economy and why we think things are happening in the economy, but they are a step back from policy. We do not have trade-off type discussions and that is, I think, a crucial part of our system”.77 In terms of other forms of communication between the Bank and HM Treasury, Mr Bailey also told us in correspondence that a Treasury representative attends MPC meetings “to ensure that the Committee is fully briefed on fiscal policy developments and other aspects of the Government’s policies, and to keep the Chancellor fully informed about monetary policy.” Beyond this, the MPC relies on the Office for Budget Responsibility’s (OBR) assessment of the impacts of announced tax and spending measures when forming its view on the economic outlook.78 Mr Bailey had previously told us, following the Truss administration’s September 2022 fiscal statement,79 that there was no formal communication “of the sort we normally have [from HM Treasury]” which was “quite an extraordinary process”.80

44.When asked whether the disinclination to explore the ‘trade-offs’ between monetary and fiscal policy was a missed opportunity, Mr Bailey responded: “I do not think it is. The value of having an independent framework is important and therefore, in a sense, it overrides anything you feel you could get from those conversations.” He considered that “such conversations would quickly undermine the value of independence and the value of the framework.”81 He also acknowledged that “fiscal policy becomes more of an issue and has more of a profile at the lower bound. That would be natural, if monetary policy were to be constrained in that sense.”82

45.Andrew Griffith MP explained:

“[The] Chancellor, before a fiscal event, will inform the Governor. There is a dialogue between selected officials in the Treasury and the Bank of England about particular moves that they may make on monetary policy. Those fall very far short of not respecting each other’s independence of action within those domains, but do not take from that that there is not a close dialogue and that each person’s action is not informed by an understanding of the other’s.”83

46.The interaction between fiscal and monetary policy requires clear lines of responsibility and effective communication between the Bank and HM Treasury to safeguard overall economic stability. It is important, particularly given the constraints of monetary policy, that when interest rates trend towards their zero lower bound HM Treasury promotes a fiscal stance which supports the inflation target it has set the Bank. The Government’s fiscal stance and the directions given to the Bank’s Monetary Policy Committee must work together. It is the Government’s job to ensure they are consistent with each other, not the Bank’s.

The impact of quantitative easing

47.Quantitative easing (QE) is a monetary policy tool used to inject money into the economy (via financial intermediaries) through the purchase of ‘financial assets’, usually government bonds. For example, by lowering yields on bonds of various maturities, QE can, in theory, help to support the economy by stimulating spending, investment and growth.84 The 2021 Economic Affairs Committee report Quantitative easing: a dangerous addiction? pointed to the risks of inflation as a result of an increase in the money supply.85 Professor Timothy Congdon, Chairman of the Institute of International Monetary Research at the University of Buckingham, told us that “In terms of understanding the latest episode [of high inflation], the quantity theory of money has been very fully vindicated.”86 Concerns about the money supply and inflation were also raised by further witnesses.87 We cover this point in Chapter 4. Here, we focus on the impact of QE on the operational framework itself.

48.In 2009, when it was introduced in the UK, QE was envisaged as a short-term measure to combat a monetary contraction that threatened to reduce sharply the level of demand and output. It also raised the level of liquid assets held by banks. It would provide financial institutions with liquidity and shore-up bond prices and hence, their owner’s balance sheets. Over the following decade, the QE programme expanded substantially which contributed to an appreciable increase in the Bank’s balance sheet88 (see Figure 5 which tracks the size of the Bank’s balance sheet as a percentage of GDP since 1900).

49.The Bank’s QE programme can be split into three broad phases. The first phase between 2009 and 2012, saw the Bank conduct seven rounds of asset purchases, totalling £375 billion by July 2012.89 The second phase from August 2016 saw the Bank purchase a further £70 billion of asset purchases in response to market uncertainty following the UK’s vote to leave the European Union.90 The third phase of QE was launched in response to the COVID-19 pandemic. For this phase, the Bank announced three rounds of asset purchases in March, June and November 2020, totalling £450 billion in Government bonds and £10 billion in non-financial investment-grade corporate bonds—broadly equivalent to the assets purchased in the first two phases of QE combined.91 It is estimated that the Bank’s balance sheet reached a record high of just under 50 per cent of GDP in February 2022.92

Figure 5: Bank of England: Combined Balance Sheet (percent of nominal GDP)

Source: Bank of England, ‘Research datasets’ (September 2023): https://www.bankofengland.co.uk/statistics/research-datasets [accessed 15 November 2023]. The combined balance sheet data refers to the end of February of each year expressed as a percentage of nominal GDP in the previous calendar year.

50.Christina Skinner, Professor of Legal Studies and Business Ethics at the University of Pennsylvania, told us that in 2020 the QE programme looked a lot like monetary finance. She added: “In 2022, we have QE that looks like it is giving an assist to the Government … In both those cases, we see a world in which QE is blurring the line between monetary and fiscal policy.”93

51.However, in its 2021 report into QE, the Economic Affairs Committee concluded that QE had made the Bank of England and HM Treasury policymaking more interdependent, blurring monetary and fiscal policy, which had eroded perceptions of the Bank acting independently of political considerations.94 It highlighted that the “Bank may come under political pressure not to raise interest rates to control inflation because the risk to the public finances and debt sustainability would have increased significantly.” The report added that if scepticism of the Bank’s stated reasons for QE were to continue to spread, “the effectiveness of the Bank’s policies will be threatened severely”.95

52.Kevin Warsh elaborated on the potential blurring of fiscal and monetary decisions in the era of QE, by emphasising that an ideal balance sheet is one that is no bigger than necessary to “conduct the core business of monetary policy”.96 He said that it is not ideal for central bankers to have to think about fiscal policy, which he considered to be “a blurring of lines and a blurring of responsibilities.”97

53.As also noted in the 2021 Economic Affairs Committee’s report, QE has served to shorten the overall ‘duration’ of the Government’s liabilities.98 Professor Goodhart told us that in view of historically low interest rates in the decade or so after the 2008 financial crisis, “shortening the duration of debt was … exactly the wrong thing to do. If interest rates are historically as low as they can ever get, you ought to lengthen the duration of debt.”99 As Professor Goodhart told us in 2021, therefore, shortening the duration constituted a “massive gamble that inflation—and, therefore, interest rates—will remain low for a very long time”.100 Professor Goodhart also observed that “The money supply as a result of QE and these purchases has been rising at rates in America that were equalled only during wartime.”101

54.Stephen D King has written that QE reduced “the ability of government bond markets … to provide ‘early-warning signals’ of a potential inflationary shock.”102

55.Andrew Griffith MP disagreed that QE had compromised the Bank’s independence by blurring the lines between fiscal and monetary policy. He said:

“The fact that the Government put an indemnity in place is true,103 but that indemnity did not relitigate the governance arrangements over monetary policy. The indemnity was not saying, ‘In return for providing it, the Treasury will reach in and dictate monetary policy for you’”.104

‘Deed of Indemnity’

56.In its 2021 QE report, the Economic Affairs Committee recommended that the ‘Deed of Indemnity’ be published and subject to public scrutiny. The ‘Deed of Indemnity’ is the contractual document between HM Treasury and the Bank of England’s Asset Purchase Facility (APF) which commits the taxpayer to paying any financial losses suffered by the Bank that might result from the QE programme. Andrew Bailey told us that he did “not see anything in it when I read it that I think would excite people if it were published, but it is not my decision—it is the Treasury’s”.105 The then Chancellor, the Rt Hon Rishi Sunak MP, refused to make the document public without explaining why.106

57.Dr Will Bateman, an Associate Professor at the Australian National University, had stated that the “secrecy” of the document is an “extraordinary feature of the UK’s quantitative easing programme”.107 Lord Macpherson of Earl’s Court, who was Permanent Secretary to HM Treasury when the ‘Deed of Indemnity’ was agreed, said that they had been focused on being as transparent as possible at the time, and hoped that it would be published to “add to the sum of human knowledge and therefore create a better debate.”108

58.Noting the former Chancellor’s decision to not publish the ‘Deed of Indemnity’, Andrew Griffith MP informed us in correspondence:

“This decision has been consistent since [the] start of the Asset Purchase Facility (APF) on account of market and commercially sensitive information in the deed, for example details relevant to the Government’s cash management operations. HM Treasury indemnifies the APF which means that any losses or gains from the APF accrue to HM Treasury. This is public knowledge and the publication of the deed of indemnity will not advance the public’s understanding of that arrangement”.109

59.Quantitative easing was a powerful tool with which to combat a monetary contraction in the aftermath of the 2008 financial crisis, but its continued deployment has blurred the lines between monetary and fiscal policy. While the quantum of quantitative easing is a monetary policy decision, decisions on debt duration have consequences for debt management. In light of the concerns raised about debt duration and the effects of quantitative easing, the Bank and the Debt Management Office (which is an agency of HM Treasury) should draw up and publish a memorandum of understanding which clarifies how the interaction between monetary policy and debt management should operate.

60.In addition, although there are differing views about the impact of quantitative easing, the Bank of England should give prominence to the study and reporting of the potential economic risks arising from any significant expansion in its balance sheet resulting from an extended quantitative easing policy.

61.We repeat the call that the Government should publish the ‘Deed of Indemnity’.

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